A Comment -- General Comments From an Expert (A Commentary)

He would just as soon use a GIC instead of an income ETF because a GIC won’t drop if interest rates go up.

Broad Index REIT ETF. XRE-T is the largest and best known in Canada. ZRE-T is equal weight and might a better strategy.

Passive Index ETFs. Have been around for a while and do a very good job of matching the markets. VCE-T and VCN-T are examples and he prefers VCN-T.

Moving stocks into the TFSA. If it is a losing stock, you have to wait 30 days before buying it back but there is no problem if it is a winning stock.

Markets. If you presume that zero percent interest rates are going to continue, you could say valuations are fair, but on the high-end of fair. If there is a rise in interest rates or some kind of recession or demand downturn, then valuations are very stretched. Historically, looking at the Schiller Cyclically Adjusted PE, we are really at the highest level, with only the 2000 tech bubble peak being higher. We are at very high margins and we have very high valuations. He is cautious, but has been so for a long time. The counterbalance is that central banks have been so aggressive going back to 2001-2002. As long as money printing is the flavour of the day for central banking, it is tough to be too negative on risk assets.

Canadian Banks. Doesn’t trade banks, but he has to have an opinion on the financial sector in order to position his portfolio. Canadian banks are probably okay in the next 6 months. However, the Canadian economy, particularly the consumer economy, is highly levered and addicted to very low interest rates. If interest rates rose 2%, think about what would happen to the average homeowner. The same with lines of credit and all the other types of loans that are out in the economy. If there is ever a sense that the Bank of Canada is going to start raising interest rates, there is going to be a shock to our economy, particularly to the financial side.

Markets. We are long overdue for a correction, especially in the US market. What he calls “free money” has really propelled markets higher than they should be. Interest rates are very low in North America, and in Europe some of them are even negative. Investors have been looking for places where they can actually earn something on their money, and have been looking at stocks, mostly dividend paying stocks. In the short term, that has pushed things beyond where they should be. He is hoping for a nice 10% correction where he has some cash that he can put to use. It is healthy to have corrections along the way. He thinks oil is going to go down again and the US$ will pick up, so that the Cdn$ and other currencies will go down again. He is still seeing attractive opportunities in Europe and Asia. Also, Australia is a market where he can invest without having currency risks. He is carrying about 10%-15% in cash.

Markets. Greece. Will they make their IMF payment? It is going down to the short strings in terms of negotiations. He feels the whole world is prepared for a deal NOT to get done. It will be disruptive for a while, however. Other countries might consider leaving the Euro. The UK is lining up for 2017 for a referendum on leaving it. He believes the Economic union is not working. The Euro might start to get stronger as countries leave it. There are questions about where the US will land in terms of their growth. The number of experts that don’t know what to do is as high as it has ever been. He thinks we will have low interest rates for years and years.

Agriculture and Infrastructure ETFs – Are they truly global? Every sector is going to have its day. Then you have periods where they underperform. If you want to buy the world then buy VT-N and Agriculture and infrastructure are included. You can go into a sector specific ETF (e.g. MOO-N and COW-T (77% US exposure)) if you think a sector is going to do better. These particular sectors will get decimated when bond stocks compete with dividends.

Educational Segment. The US$. The trend line on a chart of US vs. Canadian $ from 1967 suggests it is not over. The catalysts for this will likely last a long time. The US dollar was almost this low compared to the Canadian $ in 2008, but what is the catalyst to make the situation worse? He doesn’t see one.

Markets. He is focused on the attributes a stock has. He looks at momentum and valuation. If you looked at the 6 month returns of all stocks and ranked them, then every month made sure you held the top 25 of them you would outperform the market. On top of this he looks at valuation. If you ranked the best valuation stocks and bought those you would outperform the index. Try to bias yourself to the best combination of attributes. The deflation trade is unwinding and perhaps we are just moving into an inflation trade. March/April was when this started to shift. Investors should start to shift more into the cyclical part of the market.

Economy. Doesn’t think Central bankers have the nerve to do what needs to be done. They have inflated the value of financial assets and over applied the medicine they needed to apply after the financial crisis. We were in a dire situation and the only way to get out was to drive interest rates lower and try to raise the global economy. They left that in place too long and left themselves with no out if there is a problem down the road. More importantly, they have engendered the wrong type of behaviour by inflating financial assets. Companies, instead of spending money on expanding clients, hiring people and growing, are taking that same money and buying back their own stock. That doesn’t create a value and doesn’t create any growth. In a lot of cases, they’re using low interest rates to borrow additional funds, and using that to buy back their own stock. This is also punishing savers. People are going to be forced further out on the risk curve into the riskier assets in order to get a normal rate of return. This is creating a bubble in financial assets. They got the economy going in 2009-2010, but now China is decelerating back because they overspent, Europe is the sort of new golden child, and even at that they have 1%-1.5% growth, which is the best they can do. You also have the US slowing down because of the stronger dollar. They need to be raising rates in order to normalize the process.

Markets. The US 10 year bonds have gone from minus 2 to over 2. The market, instead of backing off, has gone on to make new highs. He thinks the market is saying that there is a trend to higher interest rates, not booming interest rates, but higher rates. That is good for the economy. We might see a shift from consumer sensitive stocks towards more economically sensitive areas. A chart on transportation averages shows it is rolling over with lower highs and lower lows. However, global infrastructure is now breaking out. The spread between these 2 is narrowing. He would back away from anything to do with consumers. Also, investors should look out more globally, and away from the US.

Canadian economy. We are still going through the process of absorbing gasoline cuts, etc. Doesn’t see inflation as being a problem. There is slow growth on both sides of the border and not a lot of inflationary pressure. Thinks Central Banks are more worried about deflation than inflation. Economic growth in Canada is slow because of Alberta. We are lucky if we can get to the 2% level. The US might get to 2.5%-3%, which would help us along as well. People should be cautious on stocks. It is a very segmented market these days. The Canadian market has the financials, commodities (which are split between oil and gas) and minerals. Doesn’t think the oil/gas stocks as well as the minerals are going to do that well, and you sort of end up with financials, but they are sort of economy stocks that are depending on those other 2 areas. It’s going to be a tough slog for Canada, until we get some stability, particularly in the energy markets. His focus has been on dividend paying stocks with those that would go through any kind of a market. Telephones and pipelines still look reasonable, and the financials are still doing fine. You have to pick your spots carefully. Internationally he is edging up to the 20% mark and still likes the US market.

REITs. He is not super enthused about this sector. Feels most of them have got reasonably well priced these days. Not particularly inclined to recommend one. If we do have interest rate increases, it will probably affect them. He is watching this, and may change his mind. (See Top Picks.)